Are your independent contractors in fact employees?

5 July 2019

Courts show little sympathy for employers who have misclassified employees as independent contractors, even where the misclassification is accidental. In recent times, there has been no shortage of workers lodging claims that they’ve been inappropriately classified as a contractor, demanding the benefits available to employees.

Publicly, the classification conundrum may have been focused on cases against Uber, Foodora and Deliveroo, but don’t be fooled into thinking that the issue is unique to the gig economy.

We have seen a growing number of claims against employers by individuals claiming to be employees but who have been engaged as independent contractors. They are two different, and legitimate, legal relationships. Misclassifying an employee as an independent contractor can be costly – legally, financially, culturally and reputationally. 

Moores recently presented to an industry group on the key distinctions between independent contractors and employees, the rights and obligations of independent contractors and the risks associated with getting it wrong.

The key takeaways are:

  1. Get it right from the start - organisations need to consider the way the relationship will work as opposed to the label it is given.  How will the individual work within the organisation? What are they required to do? How and where will they work?  The more control and integration the organisation has over the individual, the more likely the individual is an employee.
  2. Put your agreement in writing – The agreement should clearly set out the rights, obligations and expectations of both parties, and an ability to vary or terminate the contract in particular circumstances. Well drafted agreements will clarify the respective positions, reduce the potential for disputes and aim to protect an organisation’s reputation and confidential information. Simply changing a reference from ‘employee’ to ‘contractor’ in an existing agreement is dangerous. The agreements generally contain very different obligations, rights and entitlements.
  3. The existence of an independent contractor agreement doesn’t guarantee the classification - Whilst it is imperative that you have a contractor agreement in place when you engage independent contractors, its existence does not mean a Court (or ATO or Fair Work Ombudsman) will deem the individual to be an independent contractor if the reality of the work arrangements are not consistent with the individual being a contractor. Consideration will be given to whether the individual is running their own business, or is embedded within the organisation they are working with in a way which is more aligned to them being an employee, despite the contract terms and method of payment.
  4. Superannuation and insurance may be payable to independent contractors - For both superannuation and WorkCover purposes the definition of employee (and worker) is much broader than the commonly understood meaning under the Fair Work Act 2009 (Cth) (FWA).  It is therefore important to consider whether the independent contractors you engage are entitled to superannuation payments or are required to be included in your WorkCover Insurance Policy.
  5. Understand your obligations - Whilst the FWA is predominantly tailored to the employer/employee relationship, it also provides protections for independent contractors. Protections include the ability to seek remedies for adverse action, coercion and abuses of freedom of association. Like employees, independent contractors are also entitled to a safe and healthy workplace, and it is the employer/ principal’s obligation to provide such an environment. Independent contractors can also ask a Court to review a contract on the basis that it is unfair or harsh.
  6. Review, Review, Review! Just because an individual was engaged as an independent contractor does not mean that the relationship is set in stone. Over time, the engagement may actually morph from a contractor/principal relationship to an employee/employer relationship. Organisations should review their arrangements and consider the true nature of each engagement.
  7. When in doubt, get advice - There are significant penalties associated with misclassifying an employee as a contractor, particularly where there is sham contracting.  Also, where an organisation has incorrectly classified an individual as a contractor, they will be exposed to significant underpayment claims, tax liabilities and superannuation contributions.  Importantly, penalties can be ordered against an organisation and individuals involved in the breach.

If you are unsure about your current arrangements for workers within your business or need assistance with drafting employment and independent contractor agreements, please contact a member of our workplace relations team. Practice Leader, Skye Rose or Senior Lawyer, Sarah Adams can be contacted on (03) 9843 0418. Alternatively, please don't hesitate to fill out the enquiry form below.

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